August 14, 2018 Consolidated Financial Results for the First Quarter of Fiscal Year 2018 (From April 1, 2018 to June 30, 2018) [Japan GAAP] Company Name: Idemitsu Kosan Co.,Ltd. (URL http://www.idemitsu.com) Company Code: 5019, Shares listed on: Tokyo Stock Exchange Name of Representative: Shunichi Kito, Representative Director & Chief Executive Officer Contact person: Koji Tokumitsu, General Manager, Investor Relations Office, Treasury Department Telephone: +81-3-3213-9307 Scheduled date of filing of quarterly securities report: August 14, 2018 Scheduled date of commencement of dividend payments: - Supplementary materials for the quarterly financial results: Yes Quarterly financial results presentation: Yes (for institutional investors and analysts) (Figures less than 1 million are rounded off) 1. Consolidated Financial Results for the First Quarter of FY2018 (From April 1, 2018 to June 30, 2018) (1) Consolidated operating results (Percentage figures represent changes from the corresponding previous period) Net income attributable to owners of the parent Net sales Operating income Ordinary income million % million % million % million % 1Q FY2018 1,004,722 20.8 71,469 106.7 81,594 108.9 55,090 117.2 1Q FY2017 831,713 22.5 34,583 40.7 39,051 61.4 25,367 37.8 Note: Comprehensive income 1Q FY2018 34,748 million 77.6 % 1Q FY2017 19,571 million 196.0 % Net income per share Diluted net income per share 1Q FY2018 264.92-1Q FY2017 158.59 - (2) Consolidated financial position Total assets Net assets Equity ratio million million % 1Q FY2018 2,854,075 928,462 31.3 FY2017 2,920,265 905,929 29.7 Reference: Total equity 1Q FY2018 892,016 million FY2017 868,700 million 2. Dividends Cash dividends per share As of Jun.30 As of Sep.30 As of Dec.31 As of Mar.31 Total FY2017-40.00-40.00 80.00 FY2018 - FY2018 (Forecasts) 50.00-50.00 100.00 Note: Revisions of the forecasts of cash dividends since the latest announcement: None 3. Forecasts of Consolidated Financial Results for FY2018 (From April 1, 2018 to March 31, 2019) (Percentage figures represent changes from the previous fiscal year) Net sales Operating income Ordinary income Net income Net income attributable to per share owners of the parent million % million % million % million % FY2018 4,280,000 14.7 220,000 9.3 250,000 10.5 140,000 (13.7) 692.41 Note: Revisions of the forecasts of consolidated financial results since the latest announcement: Yes Setting December 28, 2018 as the due date of acquisition, the Company plans to acquire Treasury Shares with an upper limit of 12 million shares. The fiscal 2018 forecast for consolidated net income per share is calculated by reflecting the acquisition schedule in the average number of shares during the fiscal year.
* Notes (1) Changes of number of material consolidated subsidiaries during the three months ended June 30, 2018: None (2) Application of the accounting method peculiar to the preparation of the quarterly financial statements: Yes (3) Changes in accounting policies, accounting estimates and restatement a) Changes in accounting policies arising from revision of accounting standards: None b) Changes arising from other factors: None c) Changes in accounting estimates: None d) Restatement: None (4) Number of shares issued (common stock) a) Number of shares issued (including treasury stock) As of June 30, 2018: 208,000,000 As of March 31, 2018: 208,000,000 b) Number of shares of treasury stock As of June 30, 2018: 47,657 As of March 31, 2018: 47,617 c) Weighted average number of shares outstanding during the period Three months ended June 30, 2018: 207,952,369 Three months ended June 30, 2017: 159,952,737 *1 This document is out of the scope of the quarterly review procedures under the Financial Instruments and Exchange Act. *2 The financial forecasts above are based on information available and assumptions as of the date of publication of this document. Actual operating results may differ from the forecasts due to various factors. Additionally, for the assumptions used for the forecasts of the above, please refer to page 5 Explanation of Forecasts of Consolidated Financial Results for FY2018 of the Appendix.
Contents of the Appendix 1. Qualitative Information on the Consolidated Operating Results for the First Quarter of FY2018. 2 (1) Explanation of Operating Results.... 2 (2) Explanation of Financial Position 4 (3) Explanation of Forecasts of Consolidated Financial Results for FY2018... 5 2. Consolidated Financial Statements for the First Quarter of FY2018 and Major Notes. 6 (1) Consolidated Quarterly Balance Sheets.. 6 (2) Consolidated Quarterly Statements of Income and Comprehensive Income.. 8 1) Consolidated Quarterly Statements of Income 8 2) Consolidated Quarterly Statements of Comprehensive Income 9 (3) Notes to the Consolidated Quarterly Financial Statements.. 10 1) Notes on the Assumption of a Going Concern 10 2) Notes on Significant Changes in Shareholders Equity... 10 3) Application of the Accounting Method Peculiar to the Preparation of the Quarterly Financial Statements 10 4) Additional Information.. 10 5) Consolidated Segment Information.. 11 6) Significant Subsequent Events 13 1
1. Qualitative Information on the Consolidated Operating Results for the First Quarter of FY 2018 (1) Explanation of Operating Results The overall domestic demand for petroleum products during the first quarter of fiscal 2018 fell slightly below the previous year s level, reflecting the declining trend. Dubai crude oil prices continued to rise mainly on the back of higher expectations of extended coordinated production cut by OPEC, increasing geopolitical risks in the Middle East, and concerns about Iran s supply levels. Consequently, the average crude oil price for the first quarter of fiscal 2018 was $72.1/bbl, an increase of $22.3/bbl against the same period of the previous year. Producers of petrochemical products maintained high levels of operation on the back of brisk demand in Asia. The price for naphtha, a petrochemical raw material, grew by $137/ton against the same period of last year to $619/ton. (Crude oil price, naphtha price and exchange rate) Three months ended Three months ended June 30, 2017 June 30, 2018 Change Dubai Crude Oil ($/bbl) 49.8 72.1 +22.3 + 44.9% Naphtha ($/ton) 482 619 +137 + 28.4% Exchange Rate ( /$) 112.1 110.1 (2.0) (1.8)% The Idemitsu Group s net sales for the first quarter of fiscal 2018 were 1,004.7 billion, an increase of 20.8% compared with the same period of the preceding year, due mainly to increased import prices for crude oil. Operating income increased by 106.7% against the same period of the previous year to 71.5 billion, due mainly to higher margins on petroleum products and the positive effect of inventory valuation. Net non-operating income during the quarter totaled 10.1 billion, an increase of 5.7 billion from the same period of last year, owing primarily to increased Equity in earnings of nonconsolidated subsidiaries and affiliates, which resulted from an increased profit of Showa Shell Sekiyu K.K., included in the other segment. As a result, ordinary income was 81.6 billion, up 108.9% compared with the same period of last year. Extraordinary income or loss recorded 2.9 billion of income, an increase of 3.2 billion from the same period of the previous year, owing primarily to Gain on dissolution of oil field premium contract recorded in the resources segment. Tax expenses, which consist of corporate income tax, inhabitant tax and business tax, as well as income taxes-deferred, etc., amounted to 27.3 billion, an increase of 15.3 billion from the same period of the previous year, mainly due to increased income before income taxes. Net income attributable to owners of the parent increased by 117.2% compared with the same period of fiscal 2017 to 55.1 billion. The performance of each business segment for the three months ended June 30, 2018 is as follows: As to quarterly reporting periods, domestic subsidiaries use June 30 as their balance sheet date whereas overseas subsidiaries use March 31 as their balance sheet date, except for certain subsidiaries. As such, the following performance of the business segments includes the operating results of overseas subsidiaries for the three months ended March 31, 2018, and those of domestic subsidiaries for the three months ended June 30, 2017. 2
Net sales by segment Segment 1 st Quarter of FY2017 1 st Quarter of FY2018 (Unit: Billion) Change (Decrease) Amount % Petroleum products 631.1 775.6 +144.5 +22.9% Petrochemical products 114.3 145.9 +31.6 +27.7% Resources 72.2 68.1 (4.1) (5.7)% Others 14.2 15.1 +0.9 +6.7% Total 831.7 1,004.7 +173.0 +20.8% Operating income by segment Segment Petroleum products : excluding effect of inventory valuation 1 st Quarter of FY2017 6.9 12.9 1 st Quarter of FY2018 40.3 17.8 (Unit: Billion) Change (Decrease) Amount % +33.4 +4.9 +485.9% +38.1% Petrochemical products 10.2 12.6 +2.4 +23.4% Resources 18.4 19.2 +0.8 +4.3% Others 0.6 0.9 +0.3 +52.4% Reconciliation (1.4) (1.5) (0) - Total : excluding effect of inventory valuation 34.6 40.6 71.5 49.0 +36.9 +8.4 +106.7% +20.6% [Petroleum products segment] Net sales of the petroleum products segment for the three months ended June 30, 2018 were 775.6 billion, an increase of 22.9% compared with the same period of the previous year, due partly to increases in import prices for crude oil. Operating income increased by 485.9% against the same period of the preceding year to 40.3 billion, mainly due to higher product margins and the positive effect of inventory valuation. [Petrochemical products segment] Net sales of the petrochemical products segment for the three months ended June 30, 2018 were 145.9 billion, an increase of 27.7% from the same period of fiscal 2017, due largely to increases in naphtha prices on a customs clearance basis. Operating income of the segment was 12.6 billion, up 23.4% from the same period of the previous year, mainly due to higher margins on styrene monomer and other products. 3
[Resources segment] (Oil exploration and production and geothermal energy business) Net sales of the oil exploration and production business for the three months ended June 30, 2018 were 20.3 billion, up 5.6% from the corresponding period of the previous year, bolstered primarily by higher crude oil prices, despite the negative effect of reduced sales volumes due to transfer of its assets in the UK North Sea, with operating income of 9.0 billion, up 31.6% from the same period of the preceding year. (Coal business and others) Net sales of the coal business and others for the three months ended June 30, 2018 were 47.8 billion, down 9.8% compared with the same period of last year, due mainly to temporarily reduced production volumes in response to a change in the production plan and the negative effect of foreign exchange, which was partially offset by higher coal prices in the coal business, with operating income of 10.2 billion, down 11.7% from the same period of the preceding year. As a result, total net sales of the resources segment were 68.1billion, down 5.7% from the corresponding period of the previous year, and operating income was 19.2 billion, up 4.3% from the same period of the preceding year. [Other segments] Net sales of the other segments for the three months ended June 30, 2018 were 15.1 billion, up 6.7% from the same period last year, and operating income was 0.9 billion, up 52.4% compared with the same period of the preceding year. (2) Explanation of Financial Position 1) Analysis of financial position Summarized Consolidated Balance Sheets (Unit: Billion) Change (Decrease) FY2017 1 st Quarter of FY2018 Current assets 1,208.2 1,178.6 (29.6) Fixed assets 1,712.0 1,675.4 (36.6) Total assets 2,920.3 2,854.1 (66.2) Current liabilities 1,161.6 1,115.2 (46.4) Non-current liabilities 852.7 810.4 (42.3) Total liabilities 2,014.3 1,925.6 (88.7) Total net assets 905.9 928.5 +22.5 Total liabilities and net assets 2,920.3 2,854.1 (66.2) a) Total assets Total assets as of June 30, 2018 decreased by 66.2 billion from the end of the previous fiscal year to 2,854.1 billion, owing primarily to decreases in notes and accounts receivable-trade mainly due to seasonal factors as well as the liquidation of oil field premium assets as a result of dissolution of the oil field premium contract that had been signed at the time of acquisition of the Snorre field. 4
b) Total liabilities Total liabilities as of June 30, 2018 decreased by 88.7 billion from the end of the previous fiscal year to 1,925.6 billion, owing primarily to declines in notes and accounts payable-trade mainly due to seasonal factors as well as the liquidation of oil field premium liabilities as a result of dissolution of the oil field premium contract that had been signed at the time of acquisition of the Snorre field, despite increases in interest-bearing debts ( 933.5 billion as of June 30, 2018). c) Total net assets Total net assets as of June 30, 2018 grew by 22.5 billion from the end of the preceding fiscal year to 928.5 billion, primarily owing to 55.1 billion of net income attributable to owners of the parent, which was partially offset by reductions in foreign currency translation adjustments due to the appreciation of the yen and payment of dividends. Consequently, the equity ratio as of June 30, 2018 was 31.3%, improved by 1.5 percent points from 29.7% at the end of fiscal 2017. (3) Explanation of Forecasts of Consolidated Financial Results for FY2018 The Company has revised the forecasts of the consolidated financial results for the year ending March 31, 2019 released on May 15, 2018, given the actual business results for the three months ended June 30, 2018 and the latest forecasts. Please refer to Announcement on the Revision to Consolidated Earnings Forecasts announced today for details of the relevant expectations. 5
2. Consolidated Financial Statements for the First Quarter of FY2018 and Major Notes (1) Consolidated Quarterly Balance Sheets (Unit: Million) FY2017 (As of March 31, 2018) 1st Quarter of FY2018 (As of June 30, 2018) Assets Current assets: Cash and deposits 88,424 81,220 Notes and accounts receivable, trade 486,185 444,595 Inventories 535,636 555,374 Other 98,422 97,887 Less: Allowance for doubtful accounts (432) (434) Total current assets 1,208,236 1,178,643 Fixed assets: Property, plant and equipment: Machinery and equipment, net 185,959 188,794 Land 579,743 578,057 Other, net 241,080 235,444 Total property, plant and equipment 1,006,782 1,002,296 Intangible fixed assets 20,768 22,748 Investments and other assets: Investment securities 422,436 420,560 Oil field premium assets 33,081 - Other 229,024 229,800 Less: Allowance for doubtful accounts (64) (64) Total investments and other assets 684,477 650,386 Total fixed assets 1,712,029 1,675,432 Total assets 2,920,265 2,854,075 Liabilities Current liabilities: Notes and accounts payable, trade 429,550 367,662 Short-term loans payable 142,873 174,926 Commercial paper 138,001 149,000 Current portion of bonds payable 25,000 25,000 Accounts payable, other 295,421 272,852 Income taxes payable 27,542 41,768 Provision for bonuses 8,111 3,002 Other 95,106 81,013 Total current liabilities 1,161,607 1,115,225 Non-current liabilities: Bonds payable 40,000 40,000 Long-term loans payable 546,171 543,065 Liability for employees retirement benefits 13,972 13,685 Reserve for repair work 27,112 31,222 Asset retirement obligations 49,178 47,975 Oil field premium liabilities 39,274 - Other 137,019 134,438 Total non-current liabilities 852,727 810,387 Total liabilities 2,014,335 1,925,612 6
(Unit: Million) FY2017 (As of March 31, 2018) 1st Quarter of FY2018 (As of June 30, 2018) Net assets Shareholders equity: Common stock 168,351 168,351 Capital surplus 130,875 130,875 Retained earnings 403,745 449,855 Treasury stock (133) (133) Total shareholders equity 702,839 748,948 Accumulated other comprehensive income: Unrealized gains (losses) on availablefor-sale securities 10,105 10,176 Deferred gains (losses) on hedging activities, net (4,083) (5,965) Surplus from land revaluation 158,171 157,447 Foreign currency translation adjustments 919 (19,498) Defined retirement benefit plans 748 906 Total accumulated other comprehensive income 165,861 143,067 Noncontrolling interests 37,228 36,445 Total net assets 905,929 928,462 Total liabilities and net assets 2,920,265 2,854,075 7
(2) Consolidated Quarterly Statements of Income and Comprehensive Income 1) Consolidated Quarterly Statements of Income 1st Quarter of FY2017 (From April 1, 2017 to June 30, 2017) (Unit: Million) 1st Quarter of FY2018 (From April 1, 2018 to June 30, 2018) Net sales 831,713 1,004,722 Cost of sales 729,567 862,591 Gross profit 102,146 142,130 Selling, general and administrative expenses 67,562 70,661 Operating income 34,583 71,469 Non-operating income: Interest income 913 1,412 Dividend income 1,335 2,038 Equity in earnings of nonconsolidated 5,297 9,370 subsidiaries and affiliates, net Other 265 442 Total non-operating income 7,811 13,263 Non-operating expenses: Interest expense 2,443 2,095 Loss on foreign exchange, net 335 514 Other 564 528 Total non-operating expenses 3,343 3,138 Ordinary income 39,051 81,594 Extraordinary income: Gain on sales of fixed assets 15 206 Gain on sale of affiliate stock - 187 Gain on dissolution of oil field premium contract - 6,251 Other 3 8 Total extraordinary income 18 6,654 Extraordinary losses: Impairment loss on fixed assets 17 3,003 Loss on sales of fixed assets 10 24 Loss on disposals of fixed assets 303 228 Other - 475 Total extraordinary losses 332 3,730 Income before income taxes 38,737 84,517 Income taxes 12,071 27,323 Net income 26,665 57,194 Net income attributable to noncontrolling interests 1,298 2,103 Net income attributable to owners of the parent 25,367 55,090 8
2) Consolidated Quarterly Statements of Comprehensive Income 1st Quarter of FY2017 (From April 1, 2017 to June 30, 2017) (Unit: Million) 1st Quarter of FY2018 (From April 1, 2018 to June 30, 2018) (77) (265) Net income 26,665 57,194 Other comprehensive income: Unrealized gains (losses) on available-forsale securities Deferred gains on hedging activities, net 1,013 (1,481) Foreign currency translation adjustments (4,360) (15,400) Defined retirement benefit plans 282 139 Share of other comprehensive income in (3,952) (5,438) equity method affiliates Total other comprehensive income (7,094) (22,446) Comprehensive income 19,571 34,748 Comprehensive income attributable to: Owners of the parent 19,327 33,039 Noncontrolling interests 243 1,708 9
(3) Notes to the Consolidated Quarterly Financial Statements 1) Notes on the Assumption of a Going Concern None 2) Notes on Significant Changes in Shareholders Equity None 3) Application of the Accounting Method Peculiar to the Preparation of the Quarterly Financial Statements Income taxes are calculated by multiplying the income before income taxes for the three months ended June 30, 2018 by the estimated effective tax rate that is reasonably estimated for income before income taxes for the fiscal year that includes the current quarter. However, if the calculation using the relevant estimated effective tax rate leads to significantly irrational results, income taxes are calculated by multiplying the quarterly income before income taxes by the effective statutory tax rate, after adjusting important differences that do not constitute temporary differences. 4) Additional Information (Application of Partial Amendments of Accounting Standard for Tax Effect Accounting, etc.) The Company adopted Statement No.28 Partial Amendments of Accounting Standard for Tax Effect Accounting (revised on February 16, 2018), etc., from the beginning of the current fiscal year. Deferred Tax Assets are represented on Investments and other assets and Deferred Tax Liabilities are represented on Non-current liabilities. 10
5) Consolidated Segment Information First Quarter of FY2017 (From April 1, 2017 to June 30, 2017) (a) Net sales and income or loss by reportable segment Reportable segment (Unit: Million) Petroleum products Petrochemical products Resources Total Others Total Reconciliation Consolidated Net sales: Net sales to outside customers 631,072 114,252 72,233 817,559 14,154 831,713-831,713 Inter-segment 2,506 965 322 3,793 617 4,410 (4,410) - Total 633,578 115,218 72,556 821,352 14,771 836,124 (4,410) 831,713 Operating income 6,881 10,174 18,383 35,439 579 36,018 (1,435) 34,583 Notes: 1. The segment Others refers to the total of other business segments that are not included in the reportable segments, including Showa Shell Sekiyu K.K., engineering businesses, insurance businesses, electronic materials businesses, agricultural biotechnology businesses and renewable energy businesses. 2. The amount of reconciliation for the operating income mainly represents research and development costs, which do not belong to reportable segments. 3. The operating income of the reportable segments is reconciled to the amount of operating income in the consolidated quarterly statement of income. 4. Although not included in the calculation of the operating income of the reportable segments, equity in earnings of non-consolidated subsidiaries and affiliates is provided to and used by the Board of Directors on a regular basis. The equity in earnings of non-consolidated subsidiaries and affiliates of Showa Shell Sekiyu K.K. is included in the segment Others. (Petroleum products) (592) million (Petrochemical products) 2,652 million (Resources) 530 million (Others) 2,741 million (Reconciliation) (35) million (b) Impairment loss on fixed assets and goodwill by reportable segment There is no significant item during the period. 11
First Quarter of FY2018 (From April 1, 2018 to June 30, 2018) (a) Net sales and income or loss by reportable segment Reportable segment (Unit: Million) Petroleum products Petrochemical products Resources Total Others Total Reconciliation Consolidated Net sales: Net sales to outside customers 775,619 145,877 68,128 989,625 15,096 1,004,722-1,004,722 Inter-segment 2,875 1,228 174 4,278 1,035 5,314 (5,314) - Total 778,495 147,105 68,303 993,904 16,132 1,010,037 (5,314) 1,004,722 Operating income 40,318 12,553 19,176 72,048 883 72,931 (1,462) 71,469 Notes: 1. The segment Others refers to the total of other business segments that are not included in the reportable segments, including Showa Shell Sekiyu K.K., engineering businesses, insurance businesses, electronic materials businesses, agricultural biotechnology businesses and renewable energy businesses. 2. The amount of reconciliation for the operating income mainly represents research and development costs, which do not belong to reportable segments. 3. The operating income of the reportable segments is reconciled to the amount of operating income in the consolidated quarterly statement of income. 4. Although not included in the calculation of the operating income of the reportable segments, equity in earnings of non-consolidated subsidiaries and affiliates is provided to and used by the Board of Directors on a regular basis. The equity in earnings of non-consolidated subsidiaries and affiliates of Showa Shell Sekiyu K.K. is included in the segment Others. (Petroleum products) (582) million (Petrochemical products) 3,321 million (Resources) 659 million (Others) 5,974 million (Reconciliation) (2) million (b) Impairment loss on fixed assets and goodwill by reportable segment There is no significant item during the period. 12
6) Significant Subsequent Events (The Share Exchange and Acquisition of Treasury Shares for the Business Integration with Showa Shell Sekiyu K.K.) (Regarding Execution of Agreement with Our Major Shareholders) Idemitsu Kosan Co.,Ltd. ( we or the Company ) have executed an agreement (the Agreement ) with our major shareholders, namely Nissho Kosan K.K. and Mr. Masakazu Idemitsu (collectively, Our Major Shareholders ), regarding the business integration with Showa Shell Sekiyu K.K. ( Showa Shell ) on July,10, 2018. (a) Purpose and Background of the Agreement Although we have advanced discussions with Showa Shell aimed at the business integration since we executed the share purchase agreement on July 30, 2015 with subsidiary companies of Royal Dutch Shell plc to acquire Showa Shell shares, the business integration has not been realized because the discussions with Our Major Shareholders were not settled. However, during the course of the discussions, concerns of Our Major Shareholders that the corporate philosophy supporting the Company s fundamentals would not be succeeded to because of the business integration were gradually eliminated. We and Our Major Shareholders now believe that joining forces to make the Company better will enhance the Company s enterprise value, and consequently, have executed the Agreement. (b) Outline of the Agreement a) Implementation of a share exchange We will implement a share exchange (the Share Exchange ), to be effective on April 1, 2019, with Showa Shell, in which the Company will distribute its shares to shareholders of Showa Shell and acquire all of the issued shares of Showa Shell. The share exchange ratio of the Share Exchange will be appropriately determined by agreement of both companies by using the respective share prices of Showa Shell and the Company as the main criterion, and based on the results of due diligence reviews to be carried out and the profit of both companies shareholders. b) The exercise by Our Major Shareholders of voting rights to approve the Share Exchange at the Company s shareholders meeting In the case where all of the following conditions are satisfied, Our Major Shareholders shall exercise all their voting rights at the Company s extraordinary shareholders meeting (the Extraordinary Shareholders Meeting ), to be held by March 31, 2019, to approve (i) the proposal to approve the Share Exchange, and (ii) the matters to be proposed by the Company and generally related to a shareholders meeting concerning a share exchange. If Our Major Shareholders determine not to exercise their voting rights to approve any of the Company s proposals at the Extraordinary Shareholders Meeting because any of the following conditions is not satisfied, the Agreement will be immediately invalid. (i) The number of candidates to be directors (excluding independent outside directors) the Company proposes to newly elect on the occasion of the Share Exchange at the Extraordinary Shareholders Meeting is approximately five. Our Major Shareholders can recommend two persons of such five candidates. The 13
Company will, with respect to the persons that Our Major Shareholders notifies the Company will be recommended to the Company as candidates, carry out election procedures pursuant to its internal rules to admit such persons as candidates to be directors. (ii) The Company will have not submitted a proposal regarding change of its trade name at the Extraordinary Shareholders Meeting, or taken any other action against its operation policy as provided in c) below. (iii) When announcing the execution of the basic agreement with Showa Shell regarding the Share Exchange, the Company will also announce that it aims to acquire its 12 million treasury shares by the Extraordinary Shareholders Meeting. (iv) The Company will announce, by the Extraordinary Shareholders Meeting, a future medium-term management plan (the Medium-Term Management Plan ) which takes into account expected effects from the Share Exchange. Also, the Company will (i) in the Medium-Term Management Plan, indicate certain amounts as the final profit objective for three fiscal years subject to the Medium-Term Management Plan ( Fiscal Years subject to the Plan ) (upon consultation with Showa Shell, the Company sets its final profit objective for Fiscal Years subject to the Plan as a total of 500 billion yen or more), and (ii) represent that it will return to its shareholders profits for the Fiscal Years subject to the Plan at a certain rate, which is 50% or more (no less than 10% of such shareholder return will be allotted to the acquisition of treasury shares for each Fiscal Year subject to the Plan, and such acquisition of the treasury shares does not include the acquisition of the treasury shares specified in (iii) above, which will be expressly indicated in the Medium-Term Management Plan). c) Operation of the Company after the Share Exchange (i) Unless the ratio of the number of shares held by Our Major Shareholders to the number of all voting rights materially changes, Our Major Shareholders will be able to recommend two persons as candidates to be directors proposed by the Company pursuant to the procedures specified in b) (i) above. If the ratio of the number of the shares held by Our Major Shareholders to the number of all voting rights materially changes, Our Major Shareholders and the Company will have good faith discussions on how to deal with Our Major Shareholders recommendation of candidates to be directors proposed by the Company. (ii) We will maintain the Company s trade name. (iii) We will continue to use the Company s brand. (Regarding Execution of Business Integration Agreement with Showa Shell Sekiyu K.K.) Showa Shell Sekiyu K.K. ( Showa Shell ) and Idemitsu Kosan Co., Ltd. ( Idemitsu Kosan ) (collectively, the Companies ) have taken steps toward the business integration of the Companies since the Companies announced on July 30, 2015 that the Companies had entered full-scale discussions toward a business integration. On July 10, 2018, the Companies respectively held boards of directors meetings and executed an agreement regarding the business integration (the Business Integration Agreement ) as the best method of enhancing enterprise value, and the Companies decided to realize the business integration (the Business Integration ) on April 1, 2019, through procedures such as the execution of a share exchange agreement, by implementing a share exchange (the Share Exchange ), in which Idemitsu Kosan will distribute its shares to shareholders of Showa Shell and acquire all of the issued shares of Showa Shell. 14
The Share Exchange is subject to the approval of the relevant domestic and foreign competition authorities. Also, the Companies aim to execute a share exchange agreement (the Share Exchange Agreement ) by October 2018, and implement the Share Exchange subject to the approval of the Share Exchange Agreement at the extraordinary shareholders meetings of the Companies to be respectively held by December 2018. (a) Purpose of the Business Integration Showa Shell and Idemitsu Kosan intend to reinforce the enterprise value of the Companies by implementing the Business Integration, (i) in the short term, by maximizing the creation of synergies and aiming to create an entity with unparalleled competitiveness, and (ii) in the medium to long-term, by evolving in earnest to be a genuinely sustainable entity from the comprehensive perspective of business structure and initiatives concerning environment, society and governance. (b) Outline of the Business Integration a) Method and schedule for the Business Integration The Companies will carry out the Share Exchange, subject to approval at the extraordinary shareholders meetings of the Companies to be held in December 2018. The share exchange ratio of the Share Exchange will be fairly determined through an agreement between the Companies, by using the respective share prices of Showa Shell and Idemitsu Kosan as the main criterion, and based on the results of due diligence reviews to be mutually carried out by Showa Shell and Idemitsu Kosan and the profit of the Companies shareholders, etc. The Companies will proceed with the Business Integration according to the tentative schedule below. If it is necessary to amend the schedule because of notifications to the relevant authorities, etc. such as the procedures required by the relevant domestic and foreign competition authorities, registrations, acquisition of permissions/approvals, or other preparations for the Business Integration, or for other reasons, the Companies will announce the amended schedule upon mutual discussion and agreement. Execution of the share exchange agreement (agreement of share exchange ratio) Extraordinary shareholders meetings of Showa Shell and Idemitsu Kosan Date of Delisting (Showa Shell) Effective date of the Share Exchange October 2018 (scheduled) December 2018 (scheduled) March 29, 2019 (scheduled) April 1, 2019 (scheduled) The Companies have agreed that if (i) the Share Exchange Agreement has not been executed by the end of March 2019, or (ii) the proposal to approve the Share Exchange Agreement is disapproved at the extraordinary shareholders meeting of either Showa Shell or Idemitsu Kosan, the Business Integration Agreement will become invalid. b) Management structure after the Business Integration, etc. (i) Initial directors and representative directors after the implementation of the Business Integration After the implementation of the Business Integration, the basic approach to select members of the board of directors at Idemitsu Kosan will be fair, merit-based and 15
based on the right person in the right place concept, regardless of the company of which such directors are from, in order to maximize the enterprise value of the Companies. As for the initial directors of Idemitsu Kosan after implementing the Business Integration, three candidates to be directors will be nominated by Showa Shell, and five candidates to be directors will be nominated by Idemitsu Kosan. Two candidates to be directors recommended by the major shareholders of Idemitsu Kosan are included in the candidates to be directors nominated by Idemitsu Kosan. However, candidates to be directors who will assume office as independent outside directors are not included in the abovementioned candidates to be directors. With regard to candidates to be directors nominated by Showa Shell and candidates to be directors recommended by the major shareholders of Idemitsu Kosan, at the extraordinary shareholders meeting concerning the approval of the Share Exchange Agreement, Idemitsu Kosan will submit proposals to appoint directors in which the candidates will assume office as Idemitsu Kosan s directors on April 1, 2019, subject to a condition precedent that the Share Exchange becomes effective. With regard to the initial representative directors of Idemitsu Kosan after implementing the Business Integration, Showa Shell and Idemitsu Kosan will respectively nominate two candidates, and the candidates nominated by Showa Shell will assume office as the representative directors of Idemitsu Kosan on April 1, 2019. (ii) Tradename Idemitsu Showa Shell (written in Japanese Characters) is planned to be the tradename after the Business Integration is implemented. The actual operations of the tradename, including the tradename outside Japan, will be determined upon mutual discussion. (iii) Existing brand For a certain period after the Business Integration is implemented, the existing brand of the Companies will be used. (iv) Corporate governance With regard to the corporate governance structure of Idemitsu Kosan after the Business Integration is executed, the basic policy is that we will (i) actively adopt concepts indicated in the Corporate Governance Code, such as appointing four or more independent outside directors, (ii) ensuring transparent management by enhancing the monitoring function of the board of directors, and (iii) ensuring rapid and decisive business management by boldly transferring authority to the executives. (v) Policy regarding organization structure and human affairs The Companies will promptly consult with each other and agree to an organization structure which aims to create a sense of coherent unity within the group of Showa Shell and Idemitsu Kosan, and realize the maximization of synergies. With regard to the initial executive officers (excluding general managers of refineries and complexes) in charge of the corporate departments and of two or more departments of the petroleum business, general managers, and branch 16
managers of Idemitsu Kosan after the Business Integration is implemented, the Companies will respectively appoint such persons in the same number, and as for those of other departments, the present structure will, in principle, be maintained with consideration for business continuity. c) Shareholder return policy after the implementation of the Business Integration Upon discussions, Showa Shell and Idemitsu Kosan will establish and announce, by the extraordinary shareholders meetings of the Companies concerning the approval of the Share Exchange Agreement, a medium-term management plan for FY 2019 to FY 2021 (the Fiscal Years subject to the Plan ) after the Business Integration is implemented, which takes into account expected effects from the Share Exchange. Showa Shell and Idemitsu Kosan will show, in the medium-term management plan, certain amounts as the final profit objective (current net profit) for the Fiscal Years subject to the Plan, and the accumulated total amount of such amounts, which the Companies assume will be 500 billion yen or more. After the Business Integration is implemented, separate from the acquisition of treasury shares as set forth in Regarding Acquisition of Treasury Shares below, Idemitsu Kosan will return the final profit for the Fiscal Years subject to the Plan to its shareholders at a certain rate, which is 50% or more (no less than 10% of such shareholder return will be allotted to the acquisition of treasury shares for each Fiscal Year subject to the Plan). (Regarding Acquisition of Treasury Shares) Idemitsu Kosan Co.,Ltd. ( we or the Company ) resolved on its board of directors meeting on July 10, 2018, to acquire its treasury shares (the Acquisition of Treasury Shares ) as follows, pursuant to the Articles of Incorporation, under the provision of Article 459, paragraph 1 of the Companies Act of Japan. In addition, we will distribute all or part of the treasury shares to be acquired to shareholders (excluding the Company) of Showa Shell Sekiyu K.K. ( Showa Shell ) on the occasion of a share exchange with Showa Shell. (a) Purpose for the Acquisition of Treasury Shares Through the Acquisition of Treasury Shares, we intend to improve the capital efficiency and earnings per share through the decrease in number of shares, as well as to increase profit return to the shareholders. (b) Details of Acquisition a) Type of shares to be acquired Common shares of the Company b) Aggregate number of shares to be acquired 12 million shares (upper limit) (5.77% of the total number of the issued shares, excluding treasury shares) c) Aggregate amount of purchase price 55 billion yen (upper limit) d) Acquisition period From July 17, 2018 to December 28, 2018 e) Acquisition method Market purchase based on the discretionary dealing contract 17